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Do speed bumps curb low-latency investment? Evidence from a laboratory market

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  • Khapko, Mariana
  • Zoican, Marius

Abstract

Exchanges implement intentional trade delays to limit the harmful impact of low-latency trading. Do such “speed bumps” curb investment in fast trading technology? Data are scarce since trading technologies are proprietary. We build an experimental trading platform where participants face speed bumps and can invest in fast trading technology. We find that asymmetric speed bumps, on average, reduce investment in speed by only 20%. Increasing the magnitude of the speed bump by one standard deviation further reduces low-latency investment by 8.33%. Finally, introducing a symmetric speed bump leads to the same investment level as no speed bump at all.

Suggested Citation

  • Khapko, Mariana & Zoican, Marius, 2021. "Do speed bumps curb low-latency investment? Evidence from a laboratory market," Journal of Financial Markets, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:finmar:v:55:y:2021:i:c:s1386418120300707
    DOI: 10.1016/j.finmar.2020.100601
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    Cited by:

    1. Brice Corgnet & Mark DeSantis & Christoph Siemroth, 2023. "Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach," Working Papers 2313, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Eric M. Aldrich & Daniel Friedman, 2023. "Order Protection Through Delayed Messaging," Management Science, INFORMS, vol. 69(2), pages 774-790, February.

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    More about this item

    Keywords

    High-frequency trading; Experimental finance; Speed bumps; Trading technology;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General

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